On September 14, 2017, HUD’s Office of Inspector General (OIG) issued the results of its audit, 2017-LA-0004, regarding HUD’s oversight of servicers’ use of loss mitigation programs. The OIG found that HUD did not have adequate controls to ensure that servicers of FHA single family insured mortgages properly engaged in loss mitigation. Specifically, loans with insurance claims that did not have loss mitigation default status codes were not properly reviewed. This occurred because HUD did not emphasize identifying or targeting these types of loans for review. This lack of oversight may have put borrowers in default at risk of not being able to avoid foreclosure by using HUD’s loss mitigation program and resulted in an increased overall risk to the program.

The OIG recommends that these type of loans be targeted for review by HUD to ensure that servicers engage in loss mitigation. The OIG also recommends that HUD implement policies to increase communication between HUD program offices, reinforce reporting guidance for servicers, require servicers with deficiencies to improve their procedures, and require indemnification to HUD for questioned costs incurred in connection with servicing deficiencies.